CAMBRIDGE – The US Congressional Budget Office (CBO) has just delivered the bad news that the national debt is now rising faster than GDP and heading toward ratios that we usually associate with Italy or Spain. That confirms my view that the fiscal deficit is the most serious long-term economic problem facing US policymakers.

A decade ago, the federal debt was just 35% of GDP. It is now more than double that and projected to reach 86% in 2016. But that’s just the beginning. The annual budget deficit projected for 2016 is 5% of GDP. If it stays at that level, the debt ratio would eventually rise to 125%.

Even that projection assumes that interest rates on the national debt will rise slowly, averaging less than 3.5% in 2026. But if the US debt ratio really is on the fast track to triple-digit levels, investors in the US and abroad may rightly fear that the government has lost control of the budget process.

With debt exploding, foreign bondholders could begin to worry that the US will find a way to reduce its real value by stoking inflation or imposing a withholding tax on all government bond interest. In that case, investors will insist on a risk premium: higher interest rates on Treasury debt. Higher interest rates, in turn, would increase the deficit – and thus the future level of the debt ratio – even more.

The high and rising level of the national debt hurts the US economy in many ways. Paying the interest requires higher federal taxes or a larger budget deficit. In 2016, the interest on the national debt is equal to nearly 16% of the revenue from personal income tax. By 2026, the projected interest on the national debt will equal more than 31% of this revenue, even if interest rates rise as slowly as the CBO projects.

Foreign investors now own more than half of net government debt, and that proportion is likely to keep growing. Even if they are now willing to accept newly issued bonds when interest and principal on outstanding ones are due, the time will come when the US will have to pay the interest by exporting more goods and services than it imports. And boosting net exports will require a weaker dollar to make US products more attractive to foreign buyers and foreign goods more expensive to US buyers, implying a loss in Americans’ standard of living.

Increased borrowing by the federal government also means crowding out the private sector. Lower borrowing and capital investment by firms reduces future productivity growth and growth in real incomes.

So it is important to find ways to reduce the budget deficit and minimize the future debt ratio. The good news is that a relatively small reduction in the deficit can put the debt ratio on a path to a much lower level. Cutting the deficit to 2% of GDP, for example, would cause the debt ratio eventually to reach 50%.

Deficit reduction requires cutting government spending, increasing revenue, or both. Neither is politically easy; but neither should be impossible.

Cutting spending is made more difficult by the reductions in relative outlays that have already occurred. The share of GDP devoted to defense has fallen from 7.5% of GDP in 1966 to 3.2% of GDP this year, and the CBO projects it to fall to 2.6% during the next decade. That would be the lowest GDP share since World War II, representing a level of spending that military experts believe is dangerously low.

Other spending is split between the annually appropriated amounts (known as non-defense discretionary spending) and the programs in which spending follows from established rules that are not subject to annual review (known as the “mandatory” spending programs, primarily Social Security retirement benefits and health-care spending).

The non-defense discretionary spending is also heading toward 2.6% of GDP – also the smallest share of GDP since WWII. It is the mandatory programs that have grown rapidly, driving up the deficit. The mandatory programs’ share of GDP, only 4.5% in 1966, is now 13.3% and projected to reach 15% in 2026. These programs are largely benefits for middle-class seniors and not welfare programs targeted at the relatively poor. That’s why most experts agree that slowing the rise in these so-called “entitlement” programs has to be part of reducing future deficits.

Federal taxes now take 18.3% of GDP and are projected to remain at that level for the next decade, unless tax rules or rates are changed. The rate structure for personal taxation has changed over the past 30 years, with the top tax rate rising from 28% in 1986 to more than 40% now. The corporate rate of 35% is already the highest in the industrial world.

Higher marginal tax rates would weaken incentives and distort economic decisions. That’s why I and others who think about shrinking the deficit focus on changing tax rules to limit the special features known as “tax expenditures,” which represent government spending built into the tax code. These items range from small ones, like the $7,500 tax credit that goes to a buyer of an electric car, to large (for example, the deduction for mortgage interest and the exclusion from taxable income of employer payments for employee health insurance).

The mortgage deduction alone will reduce tax revenue in 2016 by $84 billion, or more than 5% of the personal income tax collected. The exclusion of health insurance premiums from employees’ taxable income will reduce revenue by more than $200 billion, or about 15% of receipts from the personal income tax.

Nothing to start shrinking the deficit will happen before this year’s presidential election. But tackling the spending and revenue components of deficit reduction should be high on the agenda when the new president takes office next year.

For a time after reunification, Saxony was widely considered an eastern German success story. Lately, however, the state's image has darkened. Weekly Pegida marches combined with an ongoing rash of anti-immigrant attacks are raising uncomfortable questions.

Horst Hirsch saw it all coming. He warned that all of Germany could start looking like Duisburg or Cologne, metropolises with a large and visible immigrant populations. He warned that the country would begin losing its identity in the face of foreign influence. He wondered out loud: "Do we want our country to become Islamic?"Hirsch, a 72-year-old from the Erzgebirge Mountains in southern Saxony, made his comments on Jan. 21, 2015, almost a full year before the New Year's Eve sexual assaults in Cologne. He was at a meeting of 300 citizens of Saxony who had gathered in Dresden's International Congress Center to talk about asylum and integration with political leaders. For weeks, the anti-immigrant group Pegida had been marching on the streets of Dresden and the state government wanted to counter that movement with an open dialogue. By chance, Hirsch ended up at a table with Saxony Governor Stanislaw Tillich, a member of Chancellor Angela Merkel's Christian Democratic Union. That evening, Hirsch said he was concerned about becoming a foreigner in his own country and that he was worried about the "militant ideology of Islam." It was also the evening when Tillich, seated at table 26, made a clear statement: "Islam does not belong to Germany."One year later, the Saxony governor doesn't have second thoughts about his statement that night. But he is beginning to despair of his state. It is a sunny morning at the end of January in Dresden and frost still covers the meadows on the banks of the Elbe River as it meanders through the city. Tillich opens his office window in the state capital building to let in some fresh air.Every Monday, Tillich has to watch as thousands of his fellow Saxons march through the historical town center waving Pegida flags. Many among them have long supported the CDU, but now accuse Tillich of being a "Volksverräter," a Nazi-era term that means "traitor to one's people." The governor feels isolated on such days. Where are the churches, the labor unions, the business community and the artists? Why are there so few people standing up to Pegida? "It is a challenge for all of society," Tillich says.

A Riddle of Significant Concern

The weekly protests against the presumed demise of the West have been ongoing in Dresden for more than 12 months, and they are set to continue. Pegida organizers have already reserved city-center squares for their demonstrations through the end of March.What is wrong with Saxony? It is a riddle that is of significant concern to Tillich and also one that has people across the country shaking their heads. It has also attracted attention internationally, with Time magazine recently putting a Pegida demonstration on its cover along with the headline: "Unwelcome." Recently, the state's image has become even darker. Last Thursday evening, an angry mob chanting "we are the people" blocked a bus full of refugees from pulling into an initial reception facility in the city of Clausnitz, near Saxony's border with the Czech Republic. The resulting video, which clearly shows the fear of the refugees inside the bus, some of them children, quickly spread around the country and beyond. Then, on Saturday night, a planned refugee hostel in the Saxon city of Bautzen, just east of Dresden, went up in flames in what police are now calling an arson attack. Some onlookers attempted to prevent the fire department from extinguishing the blaze and "demonstrated their undisguised pleasure that the building was on fire and that asylum-seekers likely won't be able to move in very soon," Thomas Knaut, from the Bautzen police, told SPIEGEL ONLINE.

The state's image has suffered tremendously as a result of such blatant racism and the negative effects on its economy have become noticeable. Tourists are staying away and scientists from abroad are cancelling planned visits to Saxon research institutes and universities, not wanting to spend time in Pegida's homeland. The xenophobic demonstrations "are destroying Dresden's image in the world," complains Christian Thielemann, principal conductor at the Staatskapelle Dresden, the city's celebrated orchestra. He would like to see a ban on demonstrations in the city center.Prior to the beginning of the Pegida marches, the city was famed for its high culture: the Grünes Gewölbe (Green Vault) museum, with its treasure chamber created by August the Strong, the Staatsschauspiel theater, the city's collection of masters, both new and old. A 2012 PISA study found the state's education system to be the best in Germany and Dresden is widely considered to be an economic motor of the former East Germany. But now? Anti-immigrant groups in the state register around 40 demonstrations per week. One-fifth of all attacks on refugee hostels in Germany occurred in Saxony last year, according to Mediendienst Integration, an organization which assembles facts and statistics pertaining to refugees in Germany. Leipzig Police President Bernd Merbitz has warned of a "pogrom-like atmosphere" against migrants in the state.It has often been said in recent months that the public mood regarding refugees in Germany is in danger of becoming nasty. In Saxony, it already has. The state offers a prime example for what happens when civil society partly fails and when discourse is non-existent.

Thankful for Pegida

In Flöha, a town near Chemnitz, Horst Hirsch is sitting in the small kitchen of his ground-floor apartment, pictures of his eight grandchildren and four children hang on the wall behind him. An amicable man with silver hair, eyeglasses and a full beard, he was monitored by the East German secret police, the Stasi, before the Wall fell and his children were not allowed to enroll in university. He earned his living working for an Evangelical youth group. The table is set with blue-onion patterned tableware and a flagpole rises outside. Next to the kitchen window hangs the Order of Merit of the Federal Republic of Germany, which he received in 2003 from then-German President Johannes Rau for his involvement in youth work, for his principled resistance to the East German regime and for his engagement on behalf of Roma from Romania. This same Horst Hirsch has taken part in Pegida demonstrations -- out of curiosity, he says. But also because he is happy "that there are people who open their mouths. That releases some of the pressure." Hirsch thinks that Germany should be thankful for Pegida "because step-by-step politicians have adopted positions long demanded by the demonstrators from Dresden." Hirsch believes the German government has moved to the left, a shift that isn't popular in eastern Germany, he says. He sees the reemergence of old socialist ideologies that promise people a kind of paradise. One example, he says, is Merkel's refugee-crisis insistence that "we can manage it." It is, he says, an attempt to manipulate the populace in accordance with one's own needs and to silence critical voices. "People in the east notice such things because we've seen it before. We've experienced forced education and patronizing," he says. People, he goes on, don't want Islam and the refugees have to respect the country's traditions instead of "putting on airs." But what are the country's traditions? "Christianity. That's what defines the social order in Germany."Statistics show that 4 percent of the populace in Saxony is Catholic and 19 percent Protestant. Fully 75 percent are unaffiliated with any religion. Forty years of socialism effectively drove religion out of the state. Hirsch is nevertheless convinced that this religious tradition holds the state together. And that Islam represents a threat to this traditional social order. The events in Cologne on New Year's Eve, which saw hundreds of women being sexually abused on the public square in front of the train station by a mob made up primarily of migrants, proves as much, he believes. He argues that the state must crack down and the police must become more proactive. Incidents like in Cologne, he says, "are the first fruits of negligent politics."

Fear of Multiculturalism

But why haven't people in western Germany drawn the same conclusions? Why have there been no mass protests there? Hirsch believes it is simply because western Germans are out of practice. Eastern Germans realized in 1989 that taking to the streets can lead to change. Although Saxons are cosmopolitan people, Hirsch says, they are afraid of the ideology of Islam and of multiculturalism. He believes that the demonstrations in Dresden will continue. "Because the problem is ongoing and because there are no significant elections approaching that might change things."The conversation with Horst Hirsch in his kitchen was largely congenial. He didn't refer to journalists as the "lying press" as Pegida does, instead calmly presenting his point of view. Could such a discussion perhaps be the foundation for a broader societal debate?Not long later, Horst Hirsch sent a furious email to the SPIEGEL editorial offices. He was upset about a critical cover story about the right-wing populist party Alternative for Germany (AfD) and suddenly no longer wanted to be quoted by name in a "leftist organ," which is why we have chosen to use a pseudonym, Horst Hirsch, to refer to him. During the interview, he was pleased by the attempt to start a dialogue, but in the email, he made it clear that the conversation was over. "Even the sweetest broth tastes terrible if the pot is dirty," he wrote.It is difficult to understand why it is Saxony where the rhetoric has grown so radical, positions so obdurate and space for exchange and compromise so limited. Many people have been monitoring this development for quite some time, and one of them is Omar Allham. He, too, has taken part in marches in Dresden -- counterdemonstrations protesting against Islamphobia and fears of foreigners felt by people like Hirsch. Born in Syria, Allham joined a demonstration of perhaps 150 people on a central square in Dresden to defend the city's diversity against thousands of Pegida fans. Allham still can't understand why more people didn't show up. "You have to show that Dresden is more than just Pegida," he says.Allham has been living in the Saxon capital for 22 years. He came to East Germany from Damascus in 1986 to study medicine. During his university years, Allham says, he encountered no racism at all. "We came from different countries, were friends with other students from Germany and we all had a common goal: to become good doctors," he says.

'Happy to Make It Home Safe'

All that changed suddenly with the end of East Germany, with taunting, threats and even physical violence becoming a common occurrence. "Often, I was just happy to make it home safe," Allham says, recalling the early 1990s when skinheads and neo-Nazis in the east hunted down immigrants, often without fear of police interference.Allham long ago took on German citizenship and works in the Heart Center at the Dresden university hospital. He lives in a middle-class, Gründerzeit neighborhood in eastern Dresden. Like Hirsch, he too believes in God, though Allham's god is called Allah. And in contrast to Hirsch, Allham doesn't believe that religion should have anything to do with politics.A look at Saxony's history could help explain why potential threats to identity may be felt more strongly here than elsewhere. It was in Saxony where the Reformation put down its first roots. Johann Sebastian Bach developed his artistic genius here and Saxony also developed its own formula for the manufacture of porcelain, a triumph of German chemistry. "All of this made Saxony a breeding ground for ideas, the center of the world," says Martin Roth, who led the Staatliche Kunstsammlungen -- the world-famous collection made up of several art and ethnographic museums in Dresden -- for years before moving on to the Victoria and Albert Museum in London. Yet Saxony has also long had a problematic relationship with its own identity. The region was the cultural heart of the German-speaking world, but its Prussian neighbors to the north were much more powerful. It was well educated, had a self-confident middle class and didn't lack for prosperity, but the region was nonetheless among the first to throw its support behind the Nazis. The state suffered World War II bombing raids on its capital comparable to those in Hamburg and Cologne, but it was only in Saxony that a cult of mourning developed -- one that continues to hold sway to this day."In Dresden, you can still sense the loss of identity during and after the Third Reich," says Roth. "What remains is this self-importance, this navel gazing, combined with the belief that they are the greatest."Just a few kilometers up the Elbe River from Dresden is Kötzschenbroda, a district of the town of Radebeul. Gabled houses from past centuries surround the central square, their ground floors providing quarters for small shops or comfortable pubs with names like Old Dispensary or Steam Ship, where the odor of Saxon specialties is unmistakable.Author Jörg Bernig moved to the tidy little town 14 years ago, renovating a 19th-century house together with his wife. Now, the place is just as attractive and comfortable as the Old Dispensary. Bernig could be completely satisfied with life. But the 52-year-old feels estranged from his country, its politicians, the media and the cultural scene. Bernig, who is a member of the Saxon Academy of Arts and the German PEN Center, is bothered by what he sees as a political correctness that imposes multiculturalism and ignores "people's need for homogeneity."

'Rage Everywhere'

A sign printed with a verse from the Book of Matthew hangs in Kötzschenbroda's main church: "Quoth Christ: For I was a stranger and you invited me in." Such "campaigns dictated from above," Bernig says during a walk across the churchyard, "are what upset the people in Saxony." He says they also alienate churchgoers "who reject the policy of unlimited admission of refugees.""Rage Everywhere" is the title Bernig chose for an essay he wrote about his views on the state of Germany and of a world that has become unmoored. The piece includes ideas that can also be found at the Pegida marches in Dresden, though they are more elegantly articulated.Instead of using the loaded Pegida term Volksverräter, Bernig writes: "What rage over the federal government's brushing aside of state sovereignty by opening the doors -- even appealing for -- mass uncontrolled, or hardly controlled, border crossings."Instead of adopting the phrase "Lügenpresse," or "lying press," he writes: "What rage too that we, the people, to use a term of pathos, are daily told how to think. Look at the chastening tone and view adopted by (the evening news) when discussing people who express criticism of refugee policies."The Dresden-based daily Sächsische Zeitung was wary of printing the piece, but it ultimately appeared on Dec. 21 and met with broad agreement. "Thank you for the courage to publish this piece," wrote one reader. Another opined that it was no longer possible "to be proud of Germany" and that one could only "think and speak in terms acceptable to the 1968 Zeitgeist." The term "1968 Zeitgeist," referring to the anti-establishment counterculture that evolved in Germany in protest against the conservative war and immediate postwar generations, is a central battle cry in Saxony. The societal modernization that took place in West Germany following the student revolts at the end of the 1960s is seen by broad swaths of Saxon's educated middle class as a fundamental evil. Modern and conflict-prone Germany has never been well received in Saxony, and not just in the narrow valleys of the Erzgebirge Mountains. Even members of the educated middle class in Dresden harbor yearnings for yesteryear. Such desires survived East Germany by way of the house concerts and poetry readings held in private salons -- and they informed the historically accurate rebuilding of Dresden.

A Glorious Past

The reestablishment of a pre-socialist civil society was one of the most important goals for them following reunification. It was an urge that Kurt Biedenkopf, the West German CDU politician who became governor of Saxony in 1990, recognized and encouraged. He realized that people are better able to deal with political upheaval if they can look back to a glorious past and cultivate a feeling of homeland. He took Bavaria, with a similarly proud history, as an example. At the CDU's initiative, state parliament resolved to declare Saxony a "free state" once again, recalling its 19th century history. Politically, it was a rather meaningless move, but it was full of symbolism. The people of Saxony were enthusiastic and it also served the needs of those in power. As the man who gave Saxony its identity back, Kurt Biedenkopf could stand up to his political adversary Chancellor Helmut Kohl in a way that only Bavarian Governor Franz-Josef Strauss had before him. At the time, SPIEGEL wrote a cover story about Saxony, with Biedenkopf depicted on horseback as Saxon Prince August the Strong. A poster of the cover image still hung in the governor's office years later.Dresden-based political scientist Hans Vorländer believes that one of Pegida's roots can be found in such regionalism. He speaks of a kind of "Saxon chauvinism": the idea that Saxons know what's right and are thus entitled to more than others.In Kötzschenbroda, the author Bernig -- who has received numerous literature prizes named after the likes of Eichendorff, Hölderlin and Lessing -- searches for other words to describe the Saxon character. Citizens of the Free State, he says, are not "outmoded," they just want to protect their state. They have been forced to endure significant changes since 1990, he says. "Now they need time to reflect and take a deep breath. They don't want the conflicts of other cultures imported."Yet when it comes to conflicts in Saxony, it is primarily the locals who are responsible, as can be seen from reports gathered on a random winter weekend: In Chemnitz, three masked men chase two migrants through the city and demolish a döner-kebab stand, injuring the owner and one of the migrants. In Bautzen, two men attack the information stand of a pro-diversity organization. On the same weekend, right-wing extremists set a former asylum-seeker hostel on fire. In Altenberg, a town in the Erzgebirge Mountains, a man wearing a steel helmet and sporting a Hitler moustache goes after two Afghans. He beats one of the two men and raises his arm in a Hitler salute.In Meissen too, home of the famous porcelain factory, a building being prepared to house refugees was set on fire. Prior to the blaze, there were anonymous warnings: notes posted on the door telling future residents to leave "our Meissen" as quickly as possible.

Harmful to the CDU's Image

The target of the arson attack is just a few hundred meters from the porcelain factory, which received 90,000 visitors from abroad in 2015. "Some people in Meissen only like foreigners when they spend money and then leave the city again at 6 p.m.," says Walter Hannot.Originally from the Rhineland, Hannot has lived in Saxony since 1991. He has been a member of the Christian Democrats since his youth and has been deputy head of CDU chapter in Meissen for just short of a year. He has organized candlelight vigils against racism and thrown parties for refugees. But many of his fellow party members aren't particularly pleased by such events, believing them to be harmful to the CDU's image. One CDU member, who used to be part of the city government, is one of the founders of Pegida and has written hate-filled postings on his Facebook page. But the local party chapter has nevertheless declined to expel him from the party. Another Christian Democrat from Meissen, Geert Mackenroth, became Saxony's commissioner for foreigners, but prefers to call himself the "commissioner for natives" and has adopted positions represented by Alternative for Germany.In such a climate, it has become difficult to represent other points of view. One group, called "Buntes Meissen," or "Diverse Meissen," promotes cooperation between Saxony and the refugees. But many shop owners prefer not to display the group's posters for fear that they might get a brick through their shop windows. "There are patrols in the city," says Hannot. "I'm beginning to feel foreign myself here in Meissen."Saxony's racism problem hasn't just developed in the last year. There have long been regions of the state where neo-Nazis have essentially taken control. The escalation of right-wing violence, Pegida's success, xenophobic demonstrations: Dietrich Herrmann, a social scientist at the Technical University of Dresden, believes that it's no accident such things are taking place in Saxony. Rather, he argues, it is the product of the state's political culture. For years, he says, manifestations of right-wing extremism have been ignored and trivialized in the state.Andrea Hübler, who works for an organization that helps victims of right-wing violence, agrees. "For years, very little has been done to counteract the daily lunacy in Saxony," she says. Every day, reports about attacks on migrants land on her desk. On behalf of her organization, Hübler has spent countless hours in recent years at trials against right-wing extremist perpetrators. Her evaluation is devastating. She says that it often takes years before perpetrators end up in court and potential right-wing motives are all too often ignored. She says that the oft-invoked judicial severity is rarely seen in practice.Instead, activists who actively campaign against racism and neo-Nazis are hassled. Anti-fascists, opposition activists and refugee helpers are often seen as disturbing the peace or meddling -- or are perceived as a threat. For a time, Saxony even had a so-called "Extremism Clause" enshrined in law, a codex that required initiatives to formally pledge allegiance to the state. The Saxon Police Force likewise spent years investigating a presumed "Antifa Sports Club," which was suspected of hunting down neo-Nazis in Saxony. The police raided apartments, forced people to take DNA tests and eavesdropped on more than 200,000 telephones. A year and a half ago, the case was dropped. The alleged leader of the group was only proven to have taken part in a peaceful demonstration against neo-Nazis.

'Problem on the Left'

When over 250 neo-Nazis and hooligans laid waste to the Connewitz neighborhood of Leipzig in January, the head of the Saxon Police Force, Jörg Michaelis, issued a warning -- against left-wing extremism and not against right-wing violence. Left-wing anarchists had engaged in a street battle with police in Leipzig just before Christmas. "We have a serious problem on the left," he said at a CDU event in Dresden.And now? Will business as usual in Saxony continue for the next several months, or even years? Has the public peace been compromised to such a degree that there is no longer room for understanding, or even for measured debate? There are places in Saxony where politicians, church leaders, artists and businesspeople stood up to Pegida from the very beginning. In Leipzig, for example, the largest city in the state. On Monday, Jan. 11, Mayor Burkhard Jung, a member of the center-left Social Democrats, joined thousands of other Leipzig residents, candle in hand, to demonstrate against Legida, the local chapter of Pegida. The organizers of the original in Dresden had called for a large rally in Leipzig, but their success was limited. Racists and Islamophobes have never had much success here, regularly encountering large groups of counter-demonstrators, as often happens in cities in western Germany.Why is Leipzig different than Dresden? Jung doesn't have an immediate answer to the question. He thinks for a while, gazing into the middle distance. He then leans over the table in his city hall office and says: "Leipzig is constantly changing and renewing itself. Half of our population has turned over since 1990. Many new residents have come over from the west." Like the mayor himself. Jung grew up in Siegen, near Cologne, and first came to Leipzig in 1991. So has Leipzig become a western German city? "In terms of its approach to life, I would say yes," Jung responds. "At least we are cosmopolitan, because of the trade shows we host, and not too Saxon."Even in Dresden, though, there have been periodic signs of improvement. It used to be that the anniversary of the Feb. 13, 1945 bombing of Dresden brought out thousands of neo-Nazis protesting the "bomb Holocaust." There were demonstrations this year too, but they were smaller -- and dwarfed by the 13,000 people who formed a human chain in opposition to war, xenophobia and extremism. "Those who close their hearts to people who come here looking for protection haven't understood the message of Feb. 13," said Dresden Mayor Dirk Hilbert.Just five days later, though, when the chanting mob blocked the refugee bus in Clausnitz, Dresden's mini-victory against extremism proved empty. Then came the refugee hostel fire in Bautzen. What's wrong with Saxony? The search for answers goes on.

STANFORD – Big changes are underway in the United States, as the country gears up to elect a new president, one-third of the Senate, and the entire House of Representatives this November. The outcome will have profound consequences for US economic policy, and thus for the global economy.

As it stands, Hillary Clinton remains the frontrunner for the Democratic nomination, though she has not yet pulled away from her socialist opponent, Senator Bernie Sanders. The bombastic billionaire Donald Trump is leading the Republican field, followed by firebrand Senator Ted Cruz of Texas, Senator Marco Rubio, a talented mainstream conservative from Florida, and, further back, popular Ohio Governor John Kasich and neurosurgeon Ben Carson.

It is impossible to know whether these early trends will hold through the rest of the primaries, now turning to the South and Midwest. America’s media and political junkies are consumed by the various possibilities. Can Rubio rally a broad coalition, or will Trump win the Republican nomination? Would a Trump nomination help Clinton win the general election?

In fact, many Republicans fear a contest pitting Trump against Clinton. Though Clinton has plenty of weaknesses – voters, especially young people, do not trust her, and she may face legal repercussions for dealing with highly classified information using a private email server when she was Secretary of State – the nasty infighting among Republicans may give her a big advantage in November. Many Republicans believe that Trump’s nomination would cost them the Senate and the White House.

With so much uncertainty, there are a number of directions that US policy could take in the coming years. While a lot of attention has been paid to headline-grabbing issues like immigration and national security, American voters are highly concerned about economic issues – concerns that the leading candidates would address in very different ways.

On trade, Trump’s ideas are dangerous and would reverse decades of beneficial bipartisan American leadership in trade liberalization, with large tariffs on foreign imports, such as from China and Mexico. The other Republican candidates barely discuss the topic. As for the Democrats, Sanders inveighs against free trade. Clinton has flip-flopped on the issue: She now opposes Canada’s Keystone XL pipeline and the Trans-Pacific Partnership, which she promoted as Secretary of State.

The risk of a trade war is low, but rising.

Clinton has also inched toward Sanders’s position on financial-system reform, as his attacks on her for taking large donations and speaking fees from Wall Street have clearly struck a chord among young voters. Confronting the big-bank bogeyman has been a centerpiece of Sanders’ campaign; Clinton is now partly echoing his populist anti-bank positions. The Democrats favor loose monetary policy, low interest rates, and a depreciated dollar. Republicans also oppose bailouts, but worry about excessively loose monetary policy and too much discretion for the US Federal Reserve outside real emergencies.

These differences will have a far-reaching impact. By appointing a new Fed Chair (or reappointing Janet Yellen), and possibly other Fed governors, the next president will have an indirect influence on interest rates, exchange rates, and global financial markets. If inflationary pressures rise – unlikely any time soon, but possible when the global economy gains strength – the Fed’s response will be a key determinant of economic stability.

The candidates also differ enormously in their tax and spending plans – and thus their deficit and debt proposals. Sanders is proposing about $18 trillion of additional spending over the next decade to cover a single-payer health-care system, infrastructure investment, and “free” (that is, taxpayer-paid) tuition at public colleges. During that period, he would impose tax hikes of $6.5 trillion, mostly on the “wealthy.” The catch: Democrats define “wealthy” as an annual household income above $250,000 – roughly the starting salary of an urban couple in their first jobs after law school. The $11.5 trillion deficit would eventually have to be covered by a gigantic future tax hike. Clinton has similar spending and tax priorities, though with smaller increases.

The Republicans want to lower personal income tax rates and broaden the tax base. They would reduce America’s corporate-tax rate – the highest in the OECD – to a far more competitive level.

Some propose replacing the current personal and corporate income taxes with a flat tax on consumption. The Republicans would slow growth in spending in most areas, while increasing defense spending. Whereas Trump proposes an outsize $10 trillion in tax cuts and Cruz about $9 trillion (statically scored), Rubio and Kasich have offered more economically and arithmetically plausible fiscal plans. Campaign proposals are, of course, partly aspirational, and will have to be negotiated with Congress.

The empirical evidence suggests that tax cuts are more likely than spending increases to spur growth, and that lower spending is more likely than tax hikes to consolidate budgets effectively.

While past experience indicates that constraining spending growth will not be easy, especially with the aging of the post-1945 baby-boom generation fueling rising health-care and pension costs, many countries – including Canada, the United Kingdom, Sweden, and even the US itself – have managed to do so in recent decades.

Republicans and Democrats differ starkly on reforming exploding entitlement costs, which have unfunded liabilities several times the national debt. The Republicans – with the exception of Trump, who rejects future Social Security “cuts” – would gradually slow growth, whereas the Democrats propose increasing Social Security benefits. The next leader of the free world should know that when a ship starts leaking, the first priority is to plug the leak, not open new ones.

Overall, the policies proposed by Sanders and Clinton would take the US closer to a European-style social-welfare state. But, as Republicans point out, Western Europe’s standard of living is 30% lower than that of the US, on average; Europe also faces slower growth, higher unemployment, and heightening social tensions. That is why Republican candidates – for the presidency, the House, and the Senate – want to roll back President Barack Obama’s tax and spending increases, expensive health-care reform, and regulatory overreach.

Nearly eight years after the financial crisis, behemoth banks still dominate the global economy.

They are still immensely complex, highly leveraged and politically powerful. They are still difficult, if not impossible, to manage and supervise. For those reasons, they remain a threat to the economy, and the notion of breaking them up appeals to many voters, policy makers and politicians.

In his campaign for the Democratic presidential nomination, Senator Bernie Sanders has made breaking up the banks a central plank of his economic agenda. The idea has merit. Smaller, more manageable banks would allow for better internal controls over dubious ethical behavior and better regulatory oversight of risky business practices that seem entrenched despite efforts at reform.

But it is also a distraction. It offers a distant and politically uncertain solution to the problem of too-big-to-fail banks that the incremental Dodd-Frank financial reforms of 2010 have already begun to address. In the process, it plays into the hands of Republican critics of Dodd-Frank, who want to repeal the post-crisis reforms and block any further regulation. That’s why Hillary Clinton’s plan — to defend and build on Dodd-Frank — makes more sense at this time.

What gets lost in the discussion is that Dodd-Frank, properly executed, would help to create the conditions for breaking up large and complex banks. That’s because the banks would face rising regulatory costs, which means they might well be worth more to investors if taken apart.

Essentially, effective regulation and market forces would work together to make banks smaller and safer.

For example, Dodd-Frank and related regulations require big banks to hold considerably more capital now than they were required to hold before the crisis. The aim is to ensure that banks can absorb any losses they may generate, instead of relying on taxpayers to pick up the bill.

Even so, the capital requirements are not strong enough, in part because they do not require banks to fully account for potential losses from the trading of derivatives, a multitrillion-dollar activity.

Recent data provided by the banks to the Federal Reserve show that capital at big American banks recently averaged a healthy 13 percent of assets. But if derivatives and other holdings were fully included — as is required under international accounting rules but not under American ones — capital would come to a feeble 5.7 percent.

Mrs. Clinton has vowed to fight for higher capital requirements, which can be accomplished without new legislation if regulators willing to impose them are appointed. Of course, that would not be as blunt a way to shrink the banks as simply requiring them to stop their riskiest trading. Still, it would not preclude breaking up the banks at some later date. And it would make the journey from here to there a safer one.

As campaign slogans go, “more capital” does not have the same ring to it as “break up the banks.”

But both are paths to the same destination. Mr. Sanders has the right goal. Mrs. Clinton has the right means.

Did you ever ask yourself what this central bank obsession with inflation is really all about? After all, it is highly ironic that these erstwhile stewards of price stability have now perversely morphed into the frantic pursuit of currency destruction. This is because the current doctrine adopted by global central bankers is that growth comes from inflation; and without inflation there can be no growth. Therefore, as their new dogma dictates, inflation must be achieved at any cost.One of the new strategies deployed by central bankers to raise prices is to push interest rates into negative territory. But negative interest rates are certainly not about paying consumers to take on new debt. And they aren't really so much about compelling banks to lend money by charging them to park fallow reserves at the central bank. Rather, the truth is negative interest rates are mostly about keeping insolvent governments afloat by constantly reducing debt service payments. In fact, there is currently about $7 trillion worth of global sovereign debt with yields that are less than zero.Thanks to record low interest rates in the U.S. (although not yet negative), the Treasury spent just $223 billion (6%) of Federal revenue to service its publicly traded debt during 2015. However, if Treasury yields went back to where they were prior to the Great Recession of 2008, that figure would jump to about $700 billion, or 21% of all Federal revenue.Since the U.S. is barely growing at record low rates, it would likely be a severe economic shock if debt service costs were to spike in such a manner. And achieving the Fed's 2% inflation target is exactly the type of thing that would the cause such a surge in borrowing costs. That's what makes the Fed's inflation quest all the more insane.But the consequence of central bank "success" in reaching a 2% inflation target in Japan would be much more destructive than in the United States. Japan officially announced the move to negative interest rates on bank deposits on January 29th. Yields on sovereign debt, which were already negative going out seven years along the curve, subsequently went negative out to 10 years. As a result of these extremely favorable interest rates, the Japanese government currently pays about 15% of its revenue to service the debt. However, if interest rates were to increase back to 2%--the level seen before the Financial Crisis-Japan would be forced to pay a whopping 60% of its revenue for debt payments.Japan has been mired in an economic morass for decades. The nation recently announced Q4 2015 GDP shrank at a 1.4% annualized rate. Indeed, Japan is flirting with its fifth recession in the last seven years and has suffered negative growth in two of the last three quarters. If debt costs were to surge from 15-60%, the Japanese economy would move from a perpetual recession to a devastating depression in short order.It is a good bet that central banks will eventually be able to achieve their inflation targets-they have historically always been able to do so. They may resort to circumventing the banking system by directly purchasing newly issued government debt if ZIRP, NIRP and QE don't satisfied their inflation goals.And this is why central banks are guaranteed to fail miserably in their effort to produce viable growth through inflation. Once inflation targets are reached they will have to begin winding down purchases of sovereign debt or risk pushing prices out of control. If not, it would lead to utter currency destruction, soaring yields on all fixed income assets and economic chaos. Therefore, they will be forced to switch from deflation fighters to inflation fighters.But this change in monetary policy will come after these central bankers have so massively distorted the bond and equity markets in relation to the economy that it could cause both equity and bond prices to crash simultaneously. This is because investors will rush to front-run the offer to sell sovereign debt and equities from central banks. It is no coincidence that the S&P 500 began its topping process once QE ended in October 2014 and that the average stock had fallen 25% in January of this year after the Fed began to raise interest rates.The real purpose of all the extraordinary and unprecedented measures taken by central banks over the past few years isn't about achieving an arbitrary inflation target. I don't believe the Fed, the European Central Bank or the Bank of Japan really believes 2% inflation is better for productivity and labor force growth than having no inflation at all. The reality is these central banks need an excuse to continue manipulating bond yields inexorably lower in order to accommodate soaring debt levels.But in this endeavor there is no easy escape. The equity and bond markets have become absolute wards of central bankers and central banks cannot stop buying government debt without causing markets and economies to crash. Of course, they will eventually have to stop in order to avoid runaway inflation. That is the huge dilemma facing global central banks. And unfortunately, this means the real economic and market volatility is yet to come.

If you know the other and know yourself, you need not fear the result of a hundred battles.

Sun Tzu

We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.